Apr 17, Washington, DC: The World Bank says despite formidable challenges, Sri Lanka's macroeconomic performance remained broadly satisfactory in 2016 thanks to key policy measures taken during the year and the recent policy reforms including monetary tightening and revenue-led fiscal consolidation have improved the outlook.
The economy is projected to grow by 4.7 percent in 2017 and marginally exceed 5.0 percent growth in the medium term, driven by private consumption and investment, a World Bank report released yesterday says.
The report "South Asia Economic Focus, Spring 2017: Globalization Backlash" which explores the economic growth in South Asia, the fastest growing region in the world, said the recent policy measures supporting fiscal consolidation and monetary tightening contributed to an improved outlook, against the backdrop of the International Monetary Fund (IMF) program.
"Continuation of the IMF program will add to the confidence and support fiscal sustainability while structural reforms supported by the World Bank are expected to yield benefits in the medium term," according to the report.
Despite the downward pressure from low international commodity prices, Sri Lanka's inflation is expected to increase in 2017 due to the impact of past currency depreciation and the rise in the VAT rate.
The external sector is poised to benefit from the reinstatement of GSP+ preferential access to European Union and rapidly growing tourism, although the drought could adversely impact exports and increase petroleum imports.
External buffers are projected to improve, with emphasis placed on purchasing foreign exchange, maintaining a more market-determined exchange rate, using monetary policy and the sale of selected government assets.
The fiscal deficit is projected to fall to 5.0 percent of GDP for 2017 due to the implementation of revenue measures.
However, the immediate challenge is to improve the external liquidity position and prepare for active liability management, the report says.
Given the significantly large external obligations falling due, especially starting in 2019, potential actions include buying back and re-issuing longer-dated bonds.
Key risks include a growth slowdown, which would lead to fast rising public debt; and delays in key reforms in a challenging political environment.
However, the direct impact of a slowdown in China and the Brexit would be limited although global policy uncertainty could weigh on the external sector performance while continued economic woes in the Middle East and the EU could adversely affect exports and remittances, according to the World Bank.
"Structural changes to public expenditure are needed to focus on investment in human and productivity-enhancing physical capital to return to a higher growth trajectory and maintain its strong recent record of poverty reduction while preparing to take care of an aging society," the World Bank report forecasts.